With many businesses suffering from the financial impacts of Covid-19 and JobKeeper payments ending, a number of companies will end up insolvent. The directors of these companies need to consider the options available to them, including whether or not to liquidate their company. However, there is a certain stigma attached to liquidation and a misconception as to its effects. But, is liquidation necessarily bad? Should you avoid liquidation at all costs? Or can liquidation actually be the best thing for your company?
This article looks at the key issues of company liquidation, including circumstances where it is beneficial for a company to be placed in liquidation.
What is Liquidation?
There are two common ways to start the process of liquidating a company:
- The shareholders of a company can resolve to appoint a liquidator to the company, often by signing a Resolution for the liquidator’s appointment; or
- A creditor who is owed more than $2,000 can apply to Court to have a liquidator appointed.
When a company is placed in liquidation, an independent liquidator will be appointed. The process of liquidating the company then begins where the liquidator will:
- Take control of the company’s assets;
- Examine the events and circumstances leading up to the liquidation of the company;
- Examine the company’s financial position in order to determine whether the company traded whilst insolvent;
- Consider whether any legal claims are available, such as claims for insolvent trading or breaches of director’s duties;
- Report the results of the liquidator’s investigations and the prospect of a dividend being paid to the company’s creditors; and
- Provide for a fair and equitable distribution of the company’s property (if any) between its creditors.
Further information in relation to liquidation can be found in our Liquidation FAQs.
Misconceptions Relating to Liquidation
When we meet with a client we will discuss and consider all viable options with them including, if feasible, how they can avoid liquidation. However one of the options often considered is also liquidation. But over the years we have found there are certain misconceptions regarding liquidation and what will happen. Some of these misconceptions are set out below and a further explanation can be found here:
- You will be harassed by creditors during liquidation process;
- If your company goes into liquidation, you cannot be a director of another company;
- If your company goes into liquidation, you cannot trade a similar type business;
- You will always be made bankrupt if your company is placed in liquidation;
- You will not be able to obtain finance if your company goes into liquidation;
- You cannot pay creditors directly if your company is placed in liquidation; and
- The ATO will be paid first in liquidation and no other creditors will get anything.
Benefits of Liquidation
There are, however, a number of benefits of appointing a liquidator to a company, including:
- Avoiding personal liability under a Director Penalty Notice issued by the ATO;
- Limiting or reducing the directors’ liability for insolvent trading;
- Limiting or reducing the directors’ liability for certain offences under the Corporations Act 2001;
- Shutting down an unprofitable business; and
- Conducting an orderly winding up of an insolvent company’s affairs.
Example – When Liquidation was the Best Option for a Client
We were previously referred a client after his company had been served with a winding-up application for tax debts owed to the ATO. The company provided security and crowd control services and owed a large tax debt. When we were engaged, we were also informed of the following:
- The company owed debts totalling more than $1 million, most of which was unpaid tax;
- The ATO had commenced liquidation proceedings against the company;
- The company primarily hired security and crowd control to pubs, clubs and other venues.
- There were no ongoing contracts with any of the company’s clients;
- The company’s employees were all employed on a casual basis;
- The company owned no significant assets; and
- The licences required to operate in the company’s business were easily obtainable.
Our client initially did not want his company to go into liquidation and wanted to avoid liquidation at all costs. However, we explained to him what the impacts of liquidation would be and also our assessment of how unlikely it was that the company could ever trade out of its current position.
Based on our advice, the client did not contest the winding-up application and the ATO liquidated the company. We facilitated and attended a meeting between the client and liquidator where we provided the liquidator with information about the company’s affairs. We also informed the liquidator of ongoing bookings/engagements which the company had which required a quick decision from him on whether to continue trading the business or whether or not he intended to market and sell it. Due to the company’s circumstances, the liquidator decided not to continue trading the company’s business or arrange a business sale. After the liquidator made that decision, our client:
- Set up a new company; and
- Approached the liquidated company’s clients and employees to inform them of the situation. All of the clients began using the services of the client’s new company.
In this case, it was simply more sensible to allow the client’s company to be placed in liquidation. Not only were there no assets of value in the company (other than debtors), the business had high levels of debt and there were limited or no barriers to entry in the type of business the company carried out. It was simply more practicable to start afresh with a new company and take over the operations of the old business, once the liquidator made the decision he did not want to trade the old company’s business or seek to sell it.
Contact Us for Assistance
If you’re considering placing your company in liquidation, or wondering whether there are other options available to you, we can help. Please contact us and we will be able to advise you on the available options, and if necessary guide you through the liquidation